Smithfield deal could transform Chinese agribusiness

Virginia will be exporting more than pork to China in the proposed $4.7 billion Smithfield Foods-Shuanghui International deal. The acquisition also might spark a transformation of Chinese agribusiness.

Like most business deals, the two parties in this transaction saw in each other something they needed.

Smithfield, the world’s largest pork producer and processor, needed a way to expand sales at a time when U.S. pork consumption was falling. Also, the Virginia company was looking for a way to reward shareholders who had become frustrated with Smithfield’s stock performance.

Shuanghui provides a conduit to a huge market where the demand for pork dwarfs the U.S. (Last year, China produced and consumed half of the world’s pork.) Shareholders, meanwhile, would get $34 a share, a 31 percent increase over the price of Smithfield’s stock one day before the deal was announced. (Still, not all are happy. At press time, a major shareholder, Starboard Value LP, proposed breaking up Smithfield and selling it in pieces, a move it believes will result in $44 to $55 per share.)

Shuanghui, on the other hand, gets a reputable supplier that will help it pursue China’s insatiable desire for pork. But it also wants to import Smithfield’s streamlined, vertically integrated system that cleans up the traditionally messy business of turning pigs into hams, bacon and sausages.

Essentially Shuanghui needs Smithfield because Chinese consumers, fed up with recent scandals ranging from contaminated meat and rice to tainted baby formula, desperately want to get their food from sources they can trust.

Currently, much of China’s pork industry is highly fragmented and out of date, according to the Wall Street Journal. Seventy percent of its pork comes from farms with fewer than 500 hogs and 38 percent from farms with fewer than 50 hogs. By contrast, 62 percent of hogs in the U.S. are raised on farms with at least 5,000 pigs, often kept in climate-controlled buildings and fed special diets. Also, China has nearly 15,000 slaughterhouses, while the U.S. has 600.

The fragmented Chinese system is difficult to inspect and regulate. Animals are not subject to the exhaustive health procedures now in use in the U.S. to prevent disease and isolate outbreaks.

China’s situation might have looked familiar to the American author Upton Sinclair. Like today’s China, the U.S. in the early 1900s was a rapidly growing country emerging as a key player in the world economy. A largely agricultural population was shifting to jobs in bustling cities. The middle class was growing, and consumer demand was rising.

Sinclair’s novel “The Jungle” shocked America with its horrific depiction of practices in the meatpacking industry. The muckraking writer drew from his experience working undercover for a socialist newspaper in the Chicago stockyards.

Public outrage eventually led to the passage of the Meat Inspection Act and the Pure Food and Drug Act of 1906, but not without the ferocious resistance of some congressmen worried about the intrusion of government into free enterprise. Despite its occasional recalls and salmonella scares, the system that emerged from those beginnings has resulted in the safest food system in the world.

In contrast to Americans, the Chinese didn’t need to read a book to learn about their food safety problems. In March, more than 16,000 dead pigs were found in tributaries to the Huangpu River, Shanghai’s source for drinking water.

In May, authorities discovered that more than 44 percent of the rice tested in a southern China province had high levels of cadmium, a poisonous metal often found in zinc ores. Food regulators, however, refused to divulge which brands were involved, leaving the public in the dark on how they could avoid the tainted rice.

Shuanghui itself has been the subject of food scandals. In 2011, for example, Chinese food inspectors found clenbuterol — a banned additive — in pork products from a Shuanghui subsidiary. The company said it had discontinued partnerships with the farmers using the additive.

Some Americans worry that, in taking over Smithfield Foods, Shuanghui will export China’s food safety problems to the U.S. These concerns likely stem from growing American distrust of the Chinese government in the wake of revelations that it has tried to steal secrets by hacking into U.S. computer systems.

Republican Delegate Bob Marshall alludes to these suspicions in a letter to Smithfield CEO Larry Pope protesting the deal. In rebutting the company’s contention that the takeover raises no security concerns, Marshall writes, “I question whether this purchase by a company the size of Shuanghui is completely independent of the Chinese Communist government. What kind of background clearances will be applied to Shuanghui employees who come to Virginia?”

Setting aside this cloak and dagger scenario, it doesn’t make sense for Shuanghui to buy a company for $4.7 billion only to ruin its name with shoddy products. In fact, Shuanghui has pledged not to import any food from China to the U.S. Instead, it wants to export Smithfield’s reputation and know-how to begin a new Chinese revolution.